The iAdvance program, managed by Meta Financial's prepaid card division Meta Payment Systems on cards issued by the holding company's subsidiary MetaBank, provided small-dollar lines of credit via NetSpend Holdings Inc. prepaid cards.
In October 2010, the program was shut down by the Office of Thrift Supervision. The federal bank regulator determined that MetaBank engaged in "unfair or deceptive acts and practices in violation of Section 5 of the Federal Trade Commission Act" based on MetaBank's "failure to implement a recurring use plan," Meta Financial said in its quarterly statement.
The OTS required Meta Financial and MetaBank to reimburse certain iAdvance customers, implement management and compliance plans and programs, and pay a $400,000 fine to the government.
The total amount Meta reimbursed to iAdvance customers came to $4.8 million. The statement also said MPS experienced a third quarter 2011 net loss of $1.9 million, compared to net income of $3 million for the same period in 2010, before the iAdvance controversy surfaced.
While Meta Financial and its bank neither admit nor deny the OTS' claims, the entities agreed to submit to the regulator's demands. Additionally, MPS must seek written approval from the OTS' regional director before the program manager can enter into third-party relationships for initiatives involving credit and prepaid products, as well as ATMs. Other stipulations are also involved.
The financial statement said Meta Financial and MetaBank were in the process of meeting the OTS' requirements by specific deadlines; they consider the iAdvance matter closed.
"We are pleased to have consensually resolved the OTS matters in the interest of our shareholders," Haahr said. "With the resolution of the OTS administrative actions, we have put the uncertainty of the reimbursement and the assessment issues behind us."
Haahr expects profitability for Meta Financial in its fiscal fourth quarter of 2011, which will partly reflect a reduction in its consulting and legal costs with its OTS obligations now behind them.
Madeline K. Aufseeser, Senior Analyst at Aite LLC, said the iAdvance issue highlights the increased level of regulatory scrutiny directed at the prepaid card industry. "I think the industry on a whole is very careful right now with what they're doing because of the amount of regulation that's being initiated," she noted.
IAdvance was shut down because of the program's fee schedule and how it was disclosed to consumers, according to Aufseeser. One way to avoid what Meta Financial experienced with iAdvance is to separate the prepaid and credit components by employing two cards for each account, she said.
"Though they might be attached to the same type of account, one card is used for the actual prepaid portion of the products, where people have money in their accounts to support that, verses another card that is used to trigger the line," Aufseeser noted.
While Aufseezer recognizes that two cards per account can be "cumbersome" for cardholders, it helps to compartmentalize the program's functions. "From a consumer mindset, now they are clearly aware that what they are doing is triggering a line of credit as opposed to using their existing funds," she said.
Despite the troubles with iAdvance, Aufseeser extols the viability of the so-called hybrid card. As prepaid cards help unbanked and underbanked consumers establish alternative bank accounts and offer convenient access to electronic payments, the loan feature gives them access to additional capital they would not otherwise have, Aufseeser said.
"The credit function actually serves a very good purpose in that it helps people: a. establish credit; b. learn how to use it responsibly; and then c. ultimately be able to get a more mainstream product," she said.
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